India Rethinks Its Poverty Line, and Its Subsidies for the Poor

An Indian ragpicker walks through garbage in search of recyclable material at a municipal waste dump on the outskirts of Siliguri on June 4, 2011. (Photo: Diptendu Dutta / AFP / Getty Images)

Indian policy-makers have called a truce to end an escalating political battle over how it measures poverty. In doing so, India may have begun a radical new experiment in giving subsidies to the poor.

India draws its poverty line based on how much people spend — not how much they earn. There are certainly other ways of measuring poverty. The U.S. used an income threshold of $22,314 for a family of four to make its recent poverty rate estimate of 15.1% — the highest in 52 years. The World Bank defines poverty as living on less than $1.25 a day, and by that measure, about 42% of India's population is poor. The UNDP uses $2 a day, and under that criterion, 75.6% of Indians would be poor.

The controversy started when India's Planning Commission came up with a new estimate for its own poverty line in September. Planning Commission chairman Montek Singh Ahluwalia submitted new price data that pegged the urban poverty line at 32 rupees (65 cents)  a day, a revision that would immediately lower India's own measure of its poor from 37% to 32% of its population. Behold: 60 million people, suddenly not poor. The move prompted howls from the Indian public at the idea that anyone living on, say, 35 rupees a day, might not be considered poor. The renowned social activist Aruna Roy accused Ahluwalia of  "artificially reducing the number of persons below the poverty line"  in order to reduce how much the government spends on them.

Whether or not the revision was an intentional attempt to reduce spending on the poor, the criticism did reach to the heart of why this all matters: many of India's massive government subsidy programs are tied to the poverty line, although states have some leeway to adjust that. India spent $8.8 billion on its flagship job-guarantee scheme last year, and billions more on other subsidies for housing and food, and in order to qualify for any of them, Indians need a document certifying them as  "below poverty line" — the "BPL" card. These are hugely popular programs, but also hugely expensive and prone to "leakage" — as some people are unable to get their "BPL" cards, and others get them unfairly.

The economist Jean Dreze, among others, has argued forcefully that tying these schemes to the "BPL" card is absurd. In a lucid, moving piece in The Hindu this week, Dreze pointed out that some states in India have opened up their subsidy programs to include just about everyone:

"In Tamil Nadu, the PDS [food subsidy] is universal — everyone has a ration card. Andhra Pradesh has rejected the BPL framework in favour of an “exclusion approach”, whereby everyone is eligible except those who meet well-defined exclusion criteria such as having a government job."

Those same states' subsidy programs are widely considered the most efficient, least corrupt and, most importantly, most effective in actually delivering help to those who need it. So why not just do the same nationwide, and assume that nearly everyone is poor enough to need some kind of subsidy, regardless of the poverty line?

It's a radical idea, but remarkably, India seems ready to do just that. Yesterday, Jairam Ramesh, the minister for rural development, which administers most of the subsidy programs, told reporters, “We are now clearly, categorically, and unequivocally saying that there is no link between state-wide poverty estimates as generated by the Planning Commission methodology currently in use and the selection of beneficiaries” to India's social welfare programs.

Meanwhile, the Planning Commission can continue using the poverty line, as it has since 1979, "to show progress in India's development over time."  Margherita Stancati asks an important question about this compromise in the Wall Street Journal's blog: "If the poverty line isn't a reliable measure of India's poor and isn't a tool to help the government target benefits to the most needy people, then what exactly is its purpose anyway?"

The answer, as with so many other complex issues in India, boils down to political necessity: populists in the Congress Party-led government get to expand a vote-winning subsidy scheme, while fiscal conservatives can trumpet India's progress in reducing poverty to foreign investors. If it works, this grand compromise might actually help the poor, whatever their numbers are. If it doesn't, both the poor and the deficit could suffer.